John Bogle: Creating Vanguard And Index Funds

An interview and Q&A with legendary investor and founder of the Vanguard Group, John C. Bogle. In this interview, John discusses his career in finance, including index funds and creating Vanguard. John also talks about his perfect portfolio and the cost matters hypothesis.

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Transcript

Hello I’m Andrew Lowe and welcome to in pursuit of the perfect portfolio. Today I have the great pleasure and privilege of speaking with one of the founders of the mutual fund industry. John Bogle or Jack as he prefers to be called. Jack thank you so much for joining us today. A pleasure. So we’re really thrilled to have the opportunity to find out a little bit more about the beginnings your beginnings and how you got started. So if you don’t mind I’d like to take you back to 1949 and this article that came out in Fortune magazine called big money in Boston. Can you tell us a bit about that and how that influenced you. Sure. First it was one of the great breaks of my lifetime. No question about that. I was in Firestone Library at Princeton just opened a new beautiful library. I don’t remember the sun coming in over my shoulder. I can remember opening Fortune magazine at a time when December of 1949 and I went home thinking about one senior thesis that was going to graduate in 1951 you can’t start too early at all. And I was a very contrarian young thinker thinker is a good word and very skeptical of having any knowledge that was delivered. I said wait a minute. Let’s take a really close look at that. And so I didn’t say I was a contrarian. I wanted to write a thesis on the subject and nobody had ever written before.

And I opened Fortune magazine and there is big money in Boston the name of the article about mass investors trust the oldest the largest and perhaps importantly compared to what happened later on the lowest cost fund in the field a very diversified. Basically S&P 500 like portfolio. Not a magic there. And the industry was described as tiny but contentious. Its total assets were around two or two and a half billion. And I thought well my God I’m tiny and I’m contentious. And no one’s ever written on this before that I knew of. There may have been something later but I have never seen it. And I picked on the spot in the library that topic for my thesis. The open ended investment company with a mutual fund and hit it with very very little research available on very little very few articles. Some in the in the legal journals about the value of diversification for estates and things like that. And then we add things like critical articles Oracle the head of the FCC chairman of the FCC saying mutual funds are going to change the marketplace. This tiny size and they haven’t done it yet but maybe they will someday. But there was I wrote to the Investment Company Institute. They’re known as the National Association of Investment Companies and ask them for the data that they had. And seven months later I got a reply. It’s just a one man shop and he finally got around to me. I think it took seven months. And so the. But my research was going to be very limited. So I made it as deep as I could.

I got all these old wesen Berger so-called books that were historically coming out every year and looked into the history and made some opinions about it read everything I could find from the hearings in 1940 act Company Act of 1940 which is only at that point nine years old. And that seems amazing to me and that I was on my way. The thesis is just an extraordinary volume that I would recommend everybody read because I was blown away by some of the things that Harvard. So I want to mention a couple of things about the thesis. First of all you began as a sophomore in terms of doing your research and the fact that you actually covered so many different aspects of open end funds and we had a lot of data on turnover and all those kind of things. Mutual fund turnover is portfolio turnover is about the same as the market the mutual funds were 1 percent of the market that they were going to do very much. And now mutual funds are I guess 25 30 percent of the market. But that gets anticipating where we go from here. And if mutual fund industry today was the same way it was when I wrote the thesis or thereafter we’ll all be actively managed funds. That was the business right and that it was all in those days. This is a very important thing that happened. It was very diversified. Just about every major fund looked like the Dow Jones Industrial Average. And you could look at the volatility wesen Verger would score that in his annual bios and you could find a couple of funds that were maybe 7 percent more Baltimore and you could find some funds that were 10 percent less of all.

But the idea of 30 percent more Bolle 30 percent less Baldus when their balance funds different case of course they were Vollard just as it was as ever supposed to be. That is two thirds of the volatility of the market. So all those things developed. But then the industry changed. And we had the boom of the go go era. Right. And the the idea that the S&P 500 like fund before the S&P 500 index was even created the index fund was even created. Everybody went into the go go thing they totally dominated. Gogo funds what is that. Funds that are created to have remarkable records to buy junk and oftentimes to buy letter stock from company founders at 50 cents in the dollar and put it into their portfolio at 100 cents in the dollar. This is a very easy way one if you get good performance. So after graduation. What then. So I definitely want to be in Philadelphia if I could possibly find. And so I looked at a bank here at a brokerage firm and you can imagine me in a brokerage for Oh My God. And I looked at William flood and Mr. Morgan who I’d met at Princeton Earl Morgan my great mentor who I met when he was 50 and knew him for 50 more years. Wow

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